Competition and Governance: Minority Shareholdings in Small Countries
Sean Ennis, Jan 10, 2012
Competition and good governance are closely related. When competition law and corporate governance intersect, it is important to be sure that the overlap gives rise to consistent policies. This paper identifies two major areas of intersection concerning minority shareholdings. The paper finds that competition law yields outcomes consistent with corporate governance standards and, at limited times, may provide an alternative path to enforceable standards of good corporate governance. Corporate governance rules are likely a more complete way of addressing distortions of competition that arise from related-party transactions than competition law. Nonetheless, somewhat surprisingly, competition law may have some role to play in cases of related-party dealing to purchase at above-market prices. In some circumstances, competition law may even provide firmer guidance than laws on corporate governance.
The first overlap between competition law and shareholding structures occurs when a common owner has shareholdings in multiple competing companies. The second occurs when a company in a group purchases from a related company (often in the same group), even when better deals for supplies could be found outside the group. On the one hand, minority shareholdings, even at a level of less than 20 percent, can create positions of influence that can merit treatment under merger review for potential lessening of competition between competing companies that are linked via a minority shareholding in one of them. This treatment of minority shareholding emphasizes that some minority shareholders may influence important business decisions. Minority shareholding can be an important factor to consider when assessing whether a merger review situation exists.
On the other hand, minority shareholders may be penalized by holders of decisive influence (including by minority-shareholding management) via anticompetitive procurement practices. Procurement and disposition practices by corporations can be intended to favor some controlling parties to the disadvantage of any minority shareholders without material influence over procurement. That is, procurement and disposition by private enterprises may be designed to reallocate corporate profits or value away from one company towards another with a high ownership share by shareholder/managers of the first company. This procurement distortion is more severe in the presence of interlocking shareholdings across distinct business enterprises providing services and products to one another, as may be more common in small and less developed countries with few major economic actors.
This paper examines how minority shareholding interacts with competition and governance in one small emerging economy (Mauritius). The paper seeks to identify those competition policy problems that are related to minority shareholdings and merit competition law consideration. While the country experiences described are those of a small country, the issues outlined in this paper are nonetheless of broad relevance, reflective of behavior that can be found on occasion in the large, developed economies.